Front Matter To" Foreign Trade Regimes and Economic

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Volume Title: Foreign Trade Regimes and Economic Development: Chile

Volume Author/Editor: Jere H. Behrman

Volume Publisher: NBER

Volume ISBN: 0-87014-508-8

Volume URL: http://www.nber.org/books/behr76-1

Publication Date: 1976

Chapter Title: Front Matter to "Foreign Trade Regimes and Economic Development: Chile"

Chapter Author: Jere H. Behrman

Chapter URL: http://www.nber.org/chapters/c4023

Chapter pages in book: (p. -25 - 0) Foreign Trade Regimes and Economic Development: CHILE

)

r Foreign Trade Regimes and Economic Development:

ASpecial Conference Series on Foreign Trade Regimes and Economic Development

VOLUME VIII

NATIONAL BUREAU OF ECONOMIC RESEARCH New York 1976 I

CHILE

by JereR. Behrman UNIVERSITY OF PENNSYLVANIA

I DISTRIBUTED BY Columbia University Press New York and London NATIONAL BUREAU OF ECONOMIC RESEARCH

A Special Conference Series on Foreign Trade Regimes and Economic Development

Library of Congress Card Number: 74—82376 ISBN for the series: 0—87014—500—2 ISBN for this volume: 0—87014—508—8

Printed in the United States of America DESIGNED BY JEFFREY M. BARBIE

- o S

NATIONAL BUREAU OF ECONOMIC RESEARCH

OFFICERS Arthur F. Burns, Honorary Chairman Robert E.Lipsey,Director, International and J. Wilson Newman, Chairman Financial Studies Moses Abramovitz, Vice Chairman Joel Popkin, Director, NBER-Washington John R. Meyer, President Harvey J. McMains, Vice President- Thomas D. Flynn, Treasurer Executive Director DouglasH. Eldrldge,ExecutiveSecretary Sherman I. Maisel, Co-director, NBER.West GaryFronun, Director, Industrial Institutions and Geoffrey H. Moore, Director, Business Processes Research Cycle Research Victor R. Fuchs, Vice President; Co-director; Edward K. Smith, Director, Corporate Planning NBER-West and Development EdwinKuh, VicePresident and Director, Computer Research Center DIRECTORS AT LARGE Atherton Bean, International Multifoods John R. Meyer, Harvard University Corporation Geoffrey H. Moore, National Bureau of Andrew F. Brinuner, Brimmer & Company, Inc. Economic Research Arthur F. Burns, Board of Governors of J. Wilson Newman, Dun & Bradstreet. Inc. the Federal Reserve System James J. O'Leary, United States Trust Wallace J. Campbell, Foundation for Company of New York Cooperative Housing Rudolph A. Oswald, American Federation of Erwin D. Canham, Chrtttian Science Monitor Labor and Congress of Industrial Organizations Emiio 0. Collado, Exxon Corporation Robert V. Roosa, Brown Brothers Harriman Solomon Fabricant, New York University & Co. Frank L. Fernbach, United Steelworkers Eli Shapiro, The Traveler: Corporation of America Arnold M. Sotoway, .#'amaicaway Tower, Eugene P. Foley,MontroseSecurities, inc. Boston, Massachusetts Edward L. Ginzton, Varian Associates Lazare Teper, International Ladies' Garment David L. Grove, international Business Workers' Union Machines Corporation Theodore 0. Yntema, Oakland University Walter W. Heller, University of Minnesota DIRECTORS BY UNIVERSITY APPOINTMENT Moses Abramovitz, Stanford Robert J. Lasnpman, Wisconsin Gardner Ackley, Michigan Maurice W. Lee, North Carolina Charles H. Berry, Princeton Almarin Phfflips, Pennsylvania Francis M. Boddy, Minnesota Lloyd 0. Reynolds, Yale Otto Eckstein, Harvard Robert M. Solow, Massachusetts Institute of Walter D. Fisher, Northwestern Technology R. A. Gordon, California, Berkeley Henri Theil, Chicago J. C. LaForce, California. Los Angeles William S. Vickrey, Columbia DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS Richard M. Bird, Canadian Economics Walter E. Hoadley, American Finance Association Association Philip M. Klutznick, Committee for Eugene A. Birnbaum, American Management Economic Development Associations Paul W. McCracken, American Statistical Carl F. Christ, American Economic Association Association Thomas D. Flynn, American Institute of Roy E. Moor, National Association of Certified Public Accountants Business Economists Harold G. Halcrow, American Agricultural Douglass C. North, Economic History Association Economics Association DIRECTORS EMERITI Percival F. Brundage Albert 3. Hettinger, Jr. Boris Sttishkin Frank W. Fetter George B. Roberts Willard L. Thorp Gottfried Haberler Murray Shields Joseph H. Wilhits I SENIOR RESEARCH STAFF Gary S. Becker 3. Royce Ginn William M. Landes M. Ishaq Nadirl Charlotte Boschan Raymond W. Goldsmith Robert B. Lipsey Nancy Ruggles Philip Cagan Michael Gort Sherman 3. Mabel Richard Ruggles Stanley Duller Michael Grossman Benoit B. Mandelbrot Anna 3. Schwartz Solomon Fabricant F. Thomas Juster John R. Meyer Edward K. Smith Milton Friedman John F. Kain Robert T. Michael George 3. Stlgler Gary Fromm John W. Kendrick Jacob Mincer Robert J. Willis Victor R. Fuchs Irving B. Kravis Use Mlntz Victor Zarnowitz Edwin Kuh Geoffrey H. Moore I

Relation of the Directors of the National Bureau to Publication of the Country Studies in the Series on Foreign Trade Regimes and Economic Development

The individual country studies have not passed through the National Bureau's normal procedures for review and approval of research reports by the Board of Directors. In view of the way in which these studies were planned and re- viewed at successive working parties of authors and Co-Directors, the Na- tional Bureau's Executive Committee has approved their publication in a manner analogous to conference proceedings, which are exempted from the rules governing submission of manuscripts to, and critical review by, the Board of Directors. It should therefore be understood that the views expressed herein are those of the authors only and do not necessarily reflect those of the National Bureau or its Board of Directors. The synthesis volumes in the series, prepared by the Co-Directors of the project, are subject to the normal procedures for review and approval by the Directors of the National Bureau.

I S

To - Lucy ii 4 Contents

Co-Directors'Foreword xix Acknowledgments xxii Principal Dates and Historical Events in Chile xxiv

Part I: Introduction

Chapter 1: The Foreign Sector and Chilean Economic Development: An Overview 3 1.1 Introduction 3 1.2 The Period Before the Great Depression 5 1.2.1 Failure to Re-establish Enduring Complete Convertibility 10 1.2.2 Shift to Foreign Ownership of Major Exports 10 1.2.3 Evolution and Impact of Import-Substitution Policies 12

1.2.4 Liberalization, Foreign Dependence, and Vulnerability 13 p 1.2.5 Liberalization and Economic Growth 17 1.3 The Impact of the Great Depression 19 1.4 Phases of Exchange Control After the Great Depression 21 1.4.1 193 1—55: Phases I and 11—A Quarter Century of Quantitative Restrictions 21 1.4.2 1956—58: Phase Ill—The Ibaflez-Klein-Saks Stabilization and Liberalization Program 27 1.4.3 1959—61: Phase IV—The Alessandri Stabilization and Liberalization Policies 28.

S X CONTENTS

1.4.4 1962—64: Phase Il—Reversal to Restrictionism, Interventionism and Inflation 29 1.4.5 1965—70: Phase 111—The Frei Stabilization and Liberalization Program 30 1.4.6 197 1—73: Phase Il—Allende and Popular Unity Policies 31 1.5 Major Conclusions 34 Notes 39

Chapter 2: An Annual Macroeconomefric Model for Chile, 1945—65 46 2.1 Structure of the Model 47 2.1.1 Policy Variables 48 2.1.2 Model Relationships 49 2.2 Simulation Procedure 52 Notes 54

Part II: Evolution of the Structure of Exchange Control Regimes in Recent Decades

Chapter 3: Exchange Control Institutions and Patterns in the Nominal Exchange Rates 59 Summary and Conclusions 59 3.1 Institutional Responsibility for Exchange Control 61 3.2 Major Trends in Nominal Exchange Rates (NERs) and Price-Level-Deflated NERs (PLD-NERs) 65 3.2.1 OfficialPLD-NER 65 3.2.2 Export Draft PLD-NER 70 3.2.3 Gold PLD-NER 70 3.2.4 Wine PLD-NER 71 3.2.5 Free Funds PLD-NER 72 3.2.6 Black- or Free-Market PLD-NER 73 3.2.7 Bank Spot PLD-NER 74 3.2.8 Bank Future PLD-NER 77 3.2.9 Special-Commercial PLD-NER 78 3.2.10 Provisional PLD-NER 78 3.2.11 Central Bank PLD-NER 78 3.2.12 Brokers' PLD-NER 78 3.2.13 National Accounts PLD-NER 79

• 3.2.14 Other Rates 80 Notes 80

a CONTENTS

Chapter 4: Supporting Policies for Exchange Control Regimes 83 4.1 Import Policies 83 4.1,1 Tariffs and Related Indirect Taxes 85 4.1.2 Quotas, Licenses, Foreign-Exchange Budgets, and Permitted Lists 88 4.1.3 Time Constraints on Foreign-Exchange Cover for Imports 91 4.1.4 Prior Deposits on Imports 92 4.1.5 Special Regimes 95 4.1.6 Bilateral, Compensation, and Barter Agreements 99 4.1.7 Government Agencies 100 4.1.8 Regional Agreements 102 4.2 Export Policies 103 4.2.1 Large-Scale Copper Mining 104 4.2.2 Other Exports 110 4.3 Policies for Other International Economic Transactions 114 4.3.1 Tourism and Other Invisibles and Imports for Personal Use 115 4.3.2 Foreign Investment Other Than in Large-Scale Copper Mining 116 4.3.3 Official Capital Flows and Foreign Debts 118 4.3.4 Miscellaneous Transactions 119 Notes 120

Chapter 5: Effective Exchange Rates, Effective Protection Rates, and Domestic Resource Costs 126 Summary and Conclusions 126 5.1 Time Paths of Import Premiums, Price-Level-Deflated Effective Exchange Rates, and Premium-Inclusive Price-Level-Deflated Effective Exchange Rates 127 5.1.1 Time Patterns in Aggregate Import Premiums and Price-Level-Deflated Effective Exchange Rates 127 5.1.2 Time Patterns in Disaggregate Premium-Inclusive Price-Level-Deflated Effective Exchange Rates 131 5.2 Implicit Tariff Rates, Effective Protection Rates, and Domestic Resource Costs in the 1960s 137 5.2.1 Mean Level of the Rates 140 5.2.2 Sectoral and Subsectoral Differences in Relative Protection 140 5.2.3 Differences in Relative Protection over Time 143 Notes 144 xii CONTENTS

Part HI: Impact of Foreign-Sector Regimes

Chapter 6: The Behavior of Merchandise Imports 149 Summary and Conclusions 149 6.1 Import Patterns Since 1930 151 6.1.1 Aggregate Merchandise Imports 151 6.1.2 Disaggregate Merchandise Imports 155 6.2 Effect of the Regimes on Imports 161 6.2.1 Partial-Equilibrium Responses 162 6.2.2 General-Equilibrium Reaction of Imports 167 Notes 169

Chapter 7: The Behavior of Merchandise Exports 172 Summary and Conclusions 172 7.1 Export Patterns Since 1930 174 7.1.1 Aggregate Merchandise Exports 174 7.1.2 Disaggregate Merchandise Exports 176 7.2 Econometric Measures of the Responses of Exports to the Regimes 185 7.2.1 Partial-Equilibrium Responses 185 7.2.2 General-Equilibrium Responses 190 Notes 193

Chapter 8: Other Components of the Balance of Payments 198 Summary and Conclusions 198 8.1 Services and Transfers 202 8.1.1 Mean Values for Phases 202 8.1.2 Within-Phase Patterns 203 8.1.3 Partial-Equilibrium Responses of Services 204 8.1.4 General-Equilibrium Responses of Services 208 8.2 Capital and Gold Flows 208 8.2.1 Net Capital Flows to the Nonmonetary Sectors 209 8.2.2 Net Capital and Gold Flows to the Monetary Sectors 213 Notes 215 fly CONTENTS Xlii

Chapter9:Short-RunStability in Nominal and Real Terms 218 Summary and Conclusions 218 9.1Nominal Stability 219 9.1.1 Relation of Inflation to Exchange Control Phases 220 9.1.2 Contribution of International Price Increases to Chilean Inflation 220 9.1.3 Price Impact of Liberalizations 220 5 9.2 Real Fluctuations 231 9.2.1 Associations of Capacity-Utilization Rates with Exchange Control Phases 231 9.2.2 Partial-Equilibrium Determinants of Capacity Utilization 231 9.2.3 Impact of Foreign-Sector Policies on Capacity Utilization Within a General-Equilibirum Framework 234 Notes 236

Chapter 10: Resource Allocation and Structural Change 240 Summary and Conclusions 241 10.1 Long-Run Trends and Phase-related Patterns in Resource Allocation 242 10.1.1 Industrial Production by Sector 242 10.1.2 Manufacturing Subsectors 247 10.2 Relations Between Resource Allocation and Price Ratios of Final to Intermediate Product 250 10.3 Costs of Attempts to Alter Resource Allocation Through Differential Incentives Created by the International Economic Regimes 251 Notes 252

Chapter 11:TheDistribution of Control over Income and Resources 254 11.1 Distribution by Income Class 256 11.1.1 Import Premiums and Distribution 256 11.1.2 Real Wages and the International Economic Regime 257 11.1.3 Employment and the International Economic Regime 259 11.2 Private Versus Government Control over Output 261 11.3 Domestic Versus Foreign Shares 262 11.4 Sectoral and Regional Distribution of Income and Resources 263 Notes 264

L Xiv CONTENTS

Chapter 12: Economic Growth 268 12.1 Over-All Growth Rates 269 12.1.1 Time-Series Evidence 269 12.1.2 Cross-Sectional Evidence 270 12.1.3 General-Equilibrium Analysis 271 12.2 An Aggregate Production Function 272 12.2.1 Quantity of Labor 273 12.2.2 Quality of Labor 273 12.2.3 Quantity of Capital 275 12.2.4 Quality of Capital 286 12.2.5 Quantity of Natural Resources 287

• 12.2.6Quantity of Foreign Factors 288 12.2.7 Miscellaneous Sources of Growth 288 Notes 288

Part IV: Three Liberalization Episodes

Chapter 13: Recent Liberalization Episodes 295 13.1 Motivations for Liberalization Efforts 296 13.1.1 External Factors 296 13.1.2 Internal Factors 300 13.2 What Was Done 301 13.2.1 Net Devaluations 301 13.2.2 Changes in Import Premiums and in Discrepancies in Effective Exchange Rates 302 13.2.3 Related Fiscal and Monetary Policies 303 13.2.4 Size and Impact of Official Foreign Credits 304 13.3 Short-Run Effects of Liberalization 305 13.3.1 Foreign-Exchange Position 305 13.3.2 Cyclical Fluctuations in Nominal and Real Terms 306 13.3.3 Resource Allocation and Structural Change 307 13.3.4 Distribution of Control over Income and Resources 307 13.3.5 Economic Growth 308 13.4 Why Liberalization Failed 308 Notes 311

Appendix A: Statistical Tables 313

Appendix B: Definition of Measures of Protection and Costs in Table 5.3 371

'I CONTENTS xv

Appendix C: Impact of Devaluation in a Simple Keynesian Model 379

9 Appendix D: Definition of Concepts and Delineation of Phases 386

0 Appendix E: List of Abbreviations Used in the Study 389 1

Bibliography 391 Index 403 '5

7 $ Tables

1.1 Exchange Rate and Selected Series on Exports, Imports, and Government Income and Expenditures of Chile, 1820—1930 6 3.1 Sources and Uses of Foreign Exchange in Chile in February 1942 62 3.2 Major Average Annual Price-Level-Deflated Nominal Exchange Rates of Chile, 193 1—72 66 5.1 ChileanPrice-Level-Deflated Effective Exchange Rates for Im- ported Goods and for Nongoods Transactions and Import Premium Rates, 1946—70 128 5.2 Chilean Ratios of Disaggregate Price-Level-Deflated Effective Exchange Rates, Premiums Included, 1946—70 134 5.3 Implicit Tariff Rates, Effective Protection Rates, and Domestic Resource Costs in Chile, 28 Sectors, 1961, 1967, and 1968 138 6.1 Mean Percentage Distribution of Chilean Imports by Country of Origin for Phases and Subphases of 1948—70 156 6.2 Percentage Composition of Chilean Consumption, Investment, and Intermediate Imports, 1960—61, 1962—64, and 1965—68 161 6.3 Chilean Real Import Functions for Major Uses of Goods, 1947—65 163 7.1 Mean Percentage of Chilean Exports by Destina- tion for Phases and Subphases of 1948—70 177 7.2 Sectoral Real Export Functions for Chile, 1947—65 186 8.1 Chilean Balance of International Payments, Annual Averages for Phases and Subphases, 1947—71 200 xvi S I TABLES XVI1

9.1 Determinants of the Rates of Change of Chilean Sectoral Prices, 1945—65 222 9.2 Determinants of Chilean Sectoral Capacity Utilization, 1947—65232 10.1 Pattern of Chilean Industrial Production, by Subsectors, 1957, 1962, and 1967 243 10.2 Chilean Mean Percentage Growth Rates of Manufacturing Sub- * sectors for Selected Years, 1914—65, and for First Year of Three Periods of Liberalization 247 10.3 Chilean Import-Substitution Coefficients, by Manufacturing Sub- sectors, 1914—64 249 12.1 Sectoral Investment Functions for Chilean Real Physical Capital, 1945—65 278 12.2 Real Consumption-Savings Functions for Chilean Households and Nonprofit Institutions, Business, and the Government, 1945—65 282 13.1 Selected Indicators of External and Internal Chilean Economic Conditions in Years Preceding Liberalization Attempts and in First and Last Years of Liberalization Episodes, 1955—70 297 A. 1 Arithmetic Means for Major Economic Variables During Phases and Subphases of the Chilean Exchange Control Regime, 1908—71 314 A.2 Exponential Growth Rates and Phase-Coincident Deviations from Growth for Real Values of Exports, Imports, Gross Domestic Product, and Capacity, 1940—65 321 A.3 Implicit Tariff Rates and Effective Protection Rates for 92 Products, 1967 325 A.4 Correlation Coefficients Among Alternative Sets of Estimates of Implicit Tariff Rates, Effective Protection Rates, and Do- mestic Resource Costs, 1961, 1967, and 1968 328 A.5 Correlation Coefficients Between Implicit Tariff Rates, Effective Protection Rates, and Domestic Resource Costs and Selected Sectoral Economic Variables, 1961, 1967, and 1968 329

A.6 Correlations Between Selected Sectoral Economic Variables and p 1967-to-1961 Ratios for Implicit Tariff Rates and Effective Pro- tection Rates 333 A.7 Chilean Average Annual Nominal and Effective Exchange Rates, 1931—72 334 A.8 Price-Level-Deflated Effective Exchange Rates, Premiums In- cluded, for Major Production Sectors and Subsectors and Demand Components, 1946—70 340 A.9 Correlation Coefficients Among Price-Level-Deflated Effective Exchange Rates, Premiums Included, for Major Production xviii CHARTS

Sectors and Subsectors and Demand Components, 1946—70 348 A. 10Percentage Changes in Ratios of Effective Exchange Rates, Premiums Included, to National Accounts Nominal Exchange Rate for Major Production Sectors and Subsectors and Demand Components, 1947—70 350 A. 11 Ex Post General-Equilibrium Elasticities of Important Eco- nomic Variables in Chile with Respect to Changes in Foreign- Sector Factors 356 B.1 Ratios of Domestic Prices to c.i.f. Prices by Sectoral Destina- tion and End Use, 1962 373

1.1 Selected Macroeconomic Variables During Phases and Sub- phases of the Chilean Exchange Control Regime, 1908—71 23 1.2 Major Components of Chile's Balance of Payments During Phases and Subphases of Her Exchange Control Regime, 1947—71 26 Co-Directors' Foreword

6 '3

This volume is one of a series resulting from the research project on Exchange Control, Liberalization, and Economic Development sponsored by the Na- tional Bureau of Economic Research, the name of the project having been sub- sequently broadened to Foreign Trade Regimes and Economic Development. Underlying the project was the belief by all participants that the phenomena of exchange control and liberalization in less developed countries require careful and detailed analysis within, a sound theoretical framework, and that the effects of individual policies and restrictions cannot be analyzed without con- sideration of both the nature of their administration and the economic environ- ment within which they are adopted as determined by the domestic economic policy and structure of the particular country. The research has thus had three aspects: (1) development of an analytical framework for handling exchange control and liberalization; (2) within that framework, research on individual countries, undertaken independently

by senior scholars; and (3) analysis of the results of these independent efforts p with a view to identifying those empirical generalizations that appear to emerge from the experience of the countries studied. The analytical framework developed in the first stage was extensively commented upon by those responsible for the research on individual countries, and was then revised to the satisfaction of all participants. That framework, serving as the common basis upon which the country studies were undertaken, is further reflected in the syntheses reporting on the third aspect of the research. The analytical framework pinpointed these three principal areas of research which all participants undertook to analyze for their own countries.

a ______

XX CO-DIRECTORS' FOREWORD

Subject to a common focus on these three areas, each participant enjoyed maximum latitude to develop the analysis of his country's experience in the way he deemed appropriate. Comparison of the country volumes will indicate that this freedom was indeed utilized, and we believe that it has paid hand- some dividends. The three areas singled out for in-depth analysis inthe country studies are: 1. The anatomy of exchange rcontrol: The economic efficiency and dis- tributional implications of alternative methods of exchange control in each country were to be examined and analyzed. Every method of exchange control differs analytically in its effects from every other. In each country study care has been taken to bring out the implications of the particular methods of control used. We consider it to be one of the major results of the project that these effects have been brought out systematically and clearly in analysis of the individual countries' experience. 2. The liberalization episode: Another major area for research was to be a detailed analysis of attempts to liberalize the payments regime. In the analytical framework, devaluation and liberalization were carefully distinguished, and concepts for quantifying the extent of devaluation and of liberalization were developed. It was hoped that careful analysis of individual devaluation and liberalization attempts, both successful and unsuccessful, would permit identification of the political and economic ingredients of an effective effort in that direction. 3. Growth relationships: Finally, the relationship of the exchange control regime to growth via static-efficiency and other factors was to be investigated. In this regard, the possible effects on savings, investment allocation, research and development, and entrepreneurship were to be highlighted. In addition to identifying the three principal areas to be investigated, the analytical framework provided a common set of concepts to be used in the studies and distinguished various phases regarded as useful in tracing the cx- perience of the individual countries and in assuring comparability of the anal- yses. The concepts are defined and the phases delineated in Appendix A. The country studies undertaken within this project and their authors are as follows: Brazil Albert Fishlow, University of California, Berkeley Chile Jere R. Behrman, University of Pennsylvania Colombia Carlos F. DIaz-Alejandro, Yale University Egypt Bent Hansen, University of California, Berkeley, and Karim Nashashibi, International Monetary Fund Ghana J. Clark Leith, University of Western Ontario

L L CO-DIRECTORS' FOREWORD xxi

India Jagdish N. Bhagwati, Massachusetts Institute of Tech- nology, and T. N. Srinivasan, Indian Statistical Institute Israel Michael Michaely, The Hebrew University of Jerusalem Philippines Robert E. Baldwin, University of Wisconsin South Korea Charles R. Frank, Jr., Princeton University and The

• Brookings Institution; Kwang Suk Kim, Korea Develop- ment Institute, Republic of Korea; and Larry E. West- phal, Northwestern University Turkey Anne 0. Krueger, University of Minnesota The principal results of the different country studies are brought to- gether in our overall syntheses. Each of the country studies, however, has been made self-contained, so that readers interested in only certain of these studies will not be handicapped. In undertaking this project and bringing it to successful completion, the authors of the individual country studies have contributed substantially to the progress of the whole endeavor, over and above their individual research. Each has commented upon the research findings of other participants, and has made numerous suggestions which have improved the overall design and execution of the project. The country authors who have collaborated with us constitute an exceptionally able group of development economists, and we wish to thank all of them for their cooperation and participation in the project. We must also thank the National Bureau of Economic Research for its sponsorship of the project and its assistance with many of the arrangements necessary in an undertaking of this magnitude. Hal B. Lary, Vice President- Research (retired), most energetically and efficiently provided both intellectual and administrative input into the project over a three-year period. We would also like to express our gratitude to the Agency for International Development for having financed the National Bureau in undertaking this project. Michael Roemer and Constantine Michalopoulos particularly deserve our sincere thanks.

JAGDISH N. BHAGWATI Massachusetts Institute of Technology ANNE 0. KRUEGER University of Minnesota r

Acknowledgments

Ihave been involved in this and related studies of the Chilean economy for over five years. Not surprisingly, the list of contributing individuals and organizations to which I am indebted is a long one. Among individuals special thanks are due to Ricardo Lira, who worked with me as a research assistant both in Santiago and in Philadelphia, and to Nancy Blossom, who contributed substantially to the computer programming and data processing. Considerable thanks also are due to a large group of economists with whom I worked or who provided suggestions while I was in Chile: Edmar Bacha, Juan de Ia Barra, Hollis Chenery, Peter Clark, Richard Eckaus, Alejandro Foxley, Eduardo Garcia, Jorge GarcIa, Everett Hagen, Arnold Harberger, Ana Marie Jul, Cristian Ossa, Paul N. Rosenstein-Rodan, and Lance Taylor, all of whom were associated with the Oficina de Planificación Nacional (ODEPLAN)— Center for International Studies of the Massachusetts Institute of Technology— Ford Foundation project in 1967—70; Jorge Cauas, Ricardo Ffrench-Davis, and Carlos Massad of the Central Bank; Teresa Jeanneret, Joseph Ramos, and John Strasma of the University of Chile; and Sergio de Ia Cuadra of the Catholic University. A number of the same individuals provided assistance in the United States, as did F. Gerard Adams, Lawrence Klein, Joze Mencinger, James McCabe, Almarin Phillips, Robert Pollak, Robert Rasche, and Oskar Rufatt at the University of Pennsylvania; Markos Mamalakis of the Latin American Studies Center at the University of Wisconsin—Milwaukee; and Hans Bergendorf of the Development Research Center of the International Bank for Reconstruction and Development. All the members of the National Bureau of Economic Research project of which this study is a part provided xxii ACKNOWLEDGMENTS

insightsdirectly or indirectly, but I owe special thanks to Jagdish Bhagwati, Carlos DIaz-Alejandrô, Charles Frank, Anne Krueger, and Hal Lary. I also wish to thank Bela Balassa for his permission to reproduce the 1961 ITR and EPR estimates in Table 5.3. Ester Moskowitz of the NBER staff provided extraordinary editing services. H. Irving Forman skillfully drew the charts and figures. Finally, Sara Nunn, Andia Brown, Margo Richardson, Florence Barrow, and the Wharton Duplication Center under the guidance of

• Anna-May Busch provided essential bibliographical, secretarial, and organiza- tional services. Among organizations, I owe special thanks to the National Bureau of

• Economic Research Project on Foreign Trade Regimes and Economic Devel- opment, financed by the Agency for International Development, under whose auspices this study was conducted. I also wish to acknowledge with gratitude the financial support for this and related work that was provided by the Ford Foundation in Santiago, a Ford Faculty Fellowship in Economics in 1971—72, the Center for International Studies of the Massachusetts Institute of Tech- nology, the University of Pennsylvania, the Development Research Center of the International Bank for Reconstruction and Development, and the National Science Foundation under Grant GS-36459. However, responsibility for the contents of this volume is entirely mine, and the aid rendered to me by the individuals and organizations mentioned above should not be construed as

• constituting endorsement of my findings, presentation, or point of view.

JERE R. BEHRMAN r

1' Principal Dates and Historical Events in Chile

1536 Spanish discovery of Chile by Diego de Almagro. 1810—18Wars of independence from Spain. 1865—66 War with Spain. 1879—83War of the Pacific; Chile defeats Peru and Bolivia and becomes owner of rich nitrate and copper deposits. 1891 Civil War; President José Manuel Balmaceda killed. 1920—24 Presidency of Arturo Alessandri; initiation of substantial social legislation; creation of Central Bank; resignation of Alessandri. 1925 Revolution; reinstatement of Alessandri, approval of new constitu- tion; abdication of Alessandri; election of Emiliano Figueroa LarraIn as president. 1927 Resignation of Figueroa LarraIn; election of Carlos Ibañez del Campo as president. 1931 Catastrophic impact of Great Depression; abandonment of convertibility; resignation of Ibanez; establishment of restrictive foreign economic regimes; succession of governments and great political instability. 1932—38 Re-establishment of political and economic order under President Arturo Alessandri (now more conservative than in 1920s). 1939 First year of Popular Front government under President Pedro Agiurre Cerda; major earthquake; creation of CORFO. 1941 President Agiurre dies. 1942 Juan Antonio RIos elected president; copper price fixed at 12

• cents per pound by agreement with United States government as part of war effort.

9 XXIV I PRINCIPAL DATES AND HISTORICAL EVENTS IN CHILE xxv

1946 President RIos dies; Gabriel Gonzalez Videla elected president with considerable support from leftist parties; copper price-fixing agreement terminated. 1947 Government moves toward right; Communist Party outlawed, diplomatic relations with Union of Soviet Socialist Republics broken. S 1950 United States unilaterally fixes copper price because of Korean conflict. 1951 Washington Treaty signed after strong Chilean outrage. 1952 Chilean copper-sales monopoly started; Ibañez elected again to presidency. 1955 Nuevo Trato (new deal) legislated for large-scale copper mining, political and economic situation disintegrates considerably; Felipe Herrera made minister of finance; Klein-Saks consulting firm contracted for aid in stabilization program. 1956 Ibañez-Klein-Saks program of stabilization plus liberalization ini- tiated. 1958 Jorge Alessandri Rodriguez elected president. 1959 Alessandri program of stabilization plus liberalization commences. 1960 Major earthquake in south. tes 1962 Stabilization-liberalization effort abandoned. 1964 Eduardo Frei Montalva elected president. 1965 Frei stabilization-liberalization effort begun; sliding-peg exchange (a! rate policy adopted; foreign debt renegotiated. 1966 Chileanization of Kennecott's copper holdings. 1967 Collapse of stabilization attempt. ba 1969 Nationalization of Anaconda's copper holdings. 1970 Abandonment of sliding-peg exchange rate policy; Salvador Al- lende Gossens elected president as head of Popular Unity Coali- tion. 1971 Complete nationalization of large-scale copper mining; intensified quantitative restrictions. 1972 Foreign-debt renegotiation. p 1973 Military coup in which President Allende killed. r